Four ways to bet on M&A

Commentary: Likely candidates are in tech, financials, consumer

By

LanceHelfert

SANTA BARBARA, Calif. (MarketWatch) — Economic forces have come into play, making a wave of mergers and acquisitions a very real possibility in the near future.

First, with corporate bond yields near historical lows, companies have the ability to raise cheap debt to help facilitate deals. Second, as reported in a recent Wall Street Journal article, nonfinancial firms were sitting on $1.93 trillion of cash and other liquid assets as of the end of September. Many large firms have amassed war chests that can be used to supplement organic growth with acquisitions.

Furthermore, many private-equity funds are holding large sums of cash that were raised prior to the Great Recession, and this money is starting to burn a hole in their pockets.

According to another Wall Street Journal article, buyout firms are holding more than $450 billion in capital that has yet to be committed to new deals, and these firms are most certainly feeling pressure from their investors to put the money to work.

Firms that are speculated to be takeout candidates often trade at premium valuations. Consequently, investing solely in anticipation of a company being taken over is risky business. A more prudent approach may be to identify undervalued companies with attractive fundamentals that represent logical acquisition candidates but are not currently the subject of takeover speculation.

This strategy provides a win-win scenario, regardless of whether an attractive buyout offer surfaces. Here are four companies that fit the mold:

Yahoo

Many investors may recall that in early 2008, Microsoft Corp.
MSFT, -0.38%
offered $33 a share to buy Yahoo Inc.
YHOO, -2.00%
but the company eventually rejected the price and Microsoft walked away. However, Yahoo still has a number of attractive assets.

Specifically, Yahoo Search could still be an interesting asset for Microsoft as it tries to compete with Google. Additionally, the company’s large investments in Alibaba (1688) of China and Yahoo Japan offer a potential acquirer a way to tap growth of Internet advertising revenues in Asia. These two stakes are carried on the balance sheet at about $3.78 billion, but the market value of the Yahoo Japan investment alone is around $6.6 billion at the current stock price.

Flight to equities

The economy is healing and January is shaping up to be strong, says Hilary Kramer, editor of Game Changer Stocks. Deals will take place immediately, and she picks some stocks that will see double-digit gains.

Despite these positive factors, Yahoo seems to be trading at a very reasonable valuation. The company has an enterprise value of about $19.4 billion. But if $636 million in long-term marketable securities and a conservative $9 billion estimate for the value of the Asian investments are subtracted out, the enterprise value falls to $9.76 billion. Given that the company has generated about $1.399 billion in EBITDA over the last 12 months, the stock is trading at less than 7 times EBITDA.

As such, Yahoo may begin to attract both strategic and private-equity buyers once again.

Molson Coors

In recent years, there has been a lot of consolidation in the global alcoholic-beverages industry. The largest example was InBev’s purchase of Anheuser-Busch
BUD, -0.29%
Given all of the activity, it is not hard to imagine an acquirer being interested in controlling Molson Coors Brewing Co.’s
TAP, +1.53%
portfolio of beers.

The world-class beers under the Molson Coors umbrella include names such as Coors Light, Blue Moon and Carling. Clearly, at the right price these brands would be a great addition to any product line.

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